Government of India is divided into three branches i.e. Legislature,
Executive and Judiciary. It is the function of the legislature to make the laws
and that of the executive, to enforce those laws. Legislature derives its power
of imposing taxes from Article 265 of the Constitution which states that:
"No tax can be levied or collected unless it has the authority of law". It is
through this article that the legislature acquires the right to impose tax and
prescribe various conditions under which such tax is applicable.
Interpretation means to give meaning to some words which are ambiguous or
unclear by looking into the intention of the legislature, purpose which the law
fulfils or the mischief it eliminates which existed prior to enactment of that
law. It is a common rule that words are to be given their direct and grammatical
meaning. But in case there are any ambiguities then the help of interpretation
is taken by understanding the context in which such words are used. Such meaning
is given which solves the purpose of the law and which seems to be intention of
Practical applicability of laws is different from drafting & enforcing the law.
It is the role of judiciary to interpret the laws made by the legislature. It is
the function of Judiciary to apply the law made by the legislature on case to
The Legislature also has power to delegate its law-making power to the Executive
for proper implementation of the laws. Such delegation of power is exercised in
form of rules, regulations, circular, clarifications and notifications. In
India, such power to issue above subordinate legislation is with Central Board
of Indirect Tax and Customs in case of indirect tax and Central Board of
Direct Tax  in case of direct tax. But all these subordinate legislations are
limited to powers given to the subordinate authorities through the principal
statute and these subordinate legislations has the same legal and binding
authority as if they are part of the parent statute.
Need & Importance of Interpretation:
As the social, economic and political conditions of the society keeps on
changing, interpretations of the laws also require change. Legislature is not
equipped to meet such changing conditions and legislature cannot anticipate
every situation which might occurred in real life. Thus, it is Courts which play
the role and interpret the laws to adapt as per needs of the society.
Rule of Strict Interpretation:
Strict rule of interpretation is one of the principles used to interpret fiscal
and penal statutes. According to this rule, plain, clear and direct meaning is
given to words which are used in common parlance by the general public to which
such law is applicable. There can be no presumption by court with respect to
Court cannot give particular meaning to a word which is not clear by making a
presumption that particular meaning is the intention of the legislature. Court
cannot under the guise of possible or likely intention of the legislature, give
meaning to the words which are not clear and where contextual meaning cannot be
Reasons for Applicability of Strict rule on Taxation Statute:
Tax is a forceful extraction of money from the assessee  by the sovereign
authority in which the taxpayer is not entitled to any assured benefit. So,
taxes place a monetary burden on the taxpayer and thus to some extent it is
considered as penalty on the taxpayer which is imposed under the authority of
law. Thus, unless the imposition of tax is clearly backed by law, no tax can be
Taxation statute is a fiscal statute which is enacted on the basis of trial and
error method or on experimentation basis. It is not practicable for legislature
to anticipate all the possible situations or conditions which may arose after
the law is enacted. It is possible that the assessee might use some shortcomings
in the law as a loophole and take advantage of it. As tax results in pecuniary
burden so the benefit of doubt is given to assesse in case of any
Strict rule is applicable to taxation statutes, so courts are bound to give
clear and plain meaning to the words without delving into the consequences it
can result in. There is no presumption of tax or intendment of the legislature
to impose tax unless clearly and specifically provided. Thus, it is the
legislature or subordinate authority to come forward and bring amendments and
clarifications to rectify the loopholes.
Thus, direct meaning is given to words used in the statute and in case of two
interpretations coming out than in that case that such interpretation is given,
which is in favour of the taxpayer. Until and unless, clear words are used in
the statute which imposes the liability on the taxpayer, there can be no burden
to pay tax. 
Rule of Interpretation applicable to Taxation Statute:
Taxation statute is a fiscal statute which imposes the pecuniary burden on the
taxpayer. So such statutes are construed strictly. Plain, clear and direct
grammatical meaning is given. Where there are two possible outcomes then that
interpretation is given which is in favour of assessee.
Any taxation statute involves three stages firstly, the subject on which tax is
levied or imposed, secondly, the assessment of the liability of assessee and
lastly, the recovery once the assessment is made. The first stage is where
charging provisions of the act are involved. These charging provisions must be
clearly provided in the statute.
These charging provisions provide the extent and coverage of the subjects as to
whom the tax is applicable. It also provides the outline in form of subjects
which the legislature wants to cover under the law. Charging provisions are to
be interpreted strictly as it results in financial burden.
There cannot be any ambiguity and meaning which is clear, obvious, direct is
given. Nothing can be inferred to substantiate the intention of the legislature
or purpose for which the law was made. Once the revenue shows that particular
subject is covered by law then tax is applicable for all those subjects. But if
it fails to proof then no tax can be imposed by extending the meaning.
Principal of equity has no role to play in case of taxation law. It is because
there is lot of deeming legal fiction involved in tax laws. Thus, whatever is
written must be strictly followed without considering its justness. If the words
are clear, then court has to give that meaning irrespective of consequences it
resulted into or in other words even if such construction is unequitable, then
also Court is bound due to legal fiction. Court cannot meet the deficiency by
extending the provisions of the statute. It is duty of the legislature to
rectify it through amendments.
Evasion of Statutes:
It is permissible to evade an Act of Parliament in the sense that a person may
not do that which the Act prohibits but he is free to do anything which though
equally advantageous to him as that which is prohibited is nevertheless outside
the prohibition, penalty or burden imposed by the Act. It is well established
that penal and taxing laws are not to be extended by analogy to cover acts and
situations not within the words of the state on any doctrine of substance.
But this principle has no application where what is done is really the thing
prohibited although under colour or cloak of different transaction not
prohibited by the statute. It is not permissible to evade an Act of Parliament
by resorting to a fraudulent device or by covering the reality by a non-genuine
transaction. The word 'evade' is thus ambiguous and is used in two senses, and
in spite of various explanations given by the courts as to the two different
meanings of that word.
In the light of above discussion we can conclude that, as the tax laws are
interpreted strictly, legislature must ensure that words used in the statute are
clear and wide enough to cover all subjects which it intend to be taxed. Words
and descriptions should be used with proper care and sophistication so as to
avoid any ambiguity.
While making the laws assistance of such experts should be taken who deal with
such laws on daily basis as they are the ones who understand the intricacies and
could help in drafting the law involving the intricacies and complexities.
Experienced Chartered Accountants, Litigators and officers of tax department
should be consulted and their experience should be considered while enacting the
laws. If the tax laws are drafted with loopholes, then the purpose of that law
is not fulfilled and the whole law collapses.